gcse economics - firms - types of business ownership

How should a business be organised? Who should own it? There are various options for a business to consider

Who owns the business?

These are all private sector organisations

SOLE TRADER / PROPRIETORSHIP

A one person business with unlimited liability

PARTNERSHIP

2 – 20 partners own, control and finance the business. They have unlimited liability

PRIVATE LIMITED COMPANY (ltd)

A Company owned by shareholders. A limited number of shares are issued, these are owned by family and friends of the business. The business has limited liability

PUBLIC LIMITED COMPANY (plc)

A Company owned by shareholders. It must have £50,000 of capital when founded, and may allow its share to be bought by the general public (though it does not have to). The business has limited liability

UNLIMITED LIABILTY

A legal obligation on the owners of the business to pay all debts of the business. Even their personal possessions may be claimed.

LIMITED LIABILITY

Shareholders are only responsible for the company’s debts up to the value of their shareholding.

CASE STUDY:

SHOP 1: NIKKI (THE SOLE TRADER)

Nikki Spencer has a small chain of clothes shops in the East Midlands. She is still a sole trader i.e. she is the legal owner.

Her biggest problem has been to raise capital to expand. Her only options have been to use her existing savings or to go the bank and borrow money but this costs interest as well.

She is also aware that if she builds up debts she could suffer from unlimited liability. This means that she could lose her house as she is responsible for the debts.

She has however really enjoyed the ability to make her own decisions, nobody is telling her what to do. Also as the sole owner, after she has paid her bills she can keep all of the profits.

SHOP 2: NEXT (THE PLC)

Next is a public limited company, it has hundreds of stores across the UK. It is still looking to expand.

It recently raised £2 million, though the issue of shares to new shareholders. This was useful for its recent expansion. The owners and shareholders are also confident because they have limited liability. This means that they can’t lose their house only the value of their shares.

The original owners of Next do face some problems. They now have to ask all their shareholders for permission, on most key decisions. e.g. should we expand abroad.

They also recently paid out 20% of their profits in dividends in order to keep their shareholders happy. Last year they paid out low dividends, many shareholders were not happy. They sold their shares and the share price fell. They are worried that if their share price falls much lower that they could become a target for a takeover.

SMART THINKING